Preforeclosure Sale Frequently Asked Questions
The Preforeclosure Sale (PFS) Program allows the Borrower in default to sell his/her home and use the Net Sale Proceeds to satisfy the mortgage debt even though these proceeds are less than the amount owed.
NOTE: NSC and Post Claims Division have developed a listing of PFS Allowable and Disallowable fees. To print out a listing of these fees, please click on the following: PFS Allowable vs. Disallowable Fees. If the fee the Lender wants to verify is not on the list, the Lender will need to submit a Variance via HUD's Extension and Variance Automated Requests System (EVARS).
Question 1: When submitting a PFS Variance for approval, what items need to be attached to a PFS Variance?
Answer: Depending on the type of Variance, the Lender may need to submit the HUD-1 Settlement Sheet, the first three pages of the FHA "As Is" Appraisal, and/or Hardship Letter.
Question 2: Previous HUD-1 Settlement Sheets have been submitted to NSC, only for NSC to deny the Variance due to buyer or seller receiving cash at the PFS closing. Please provide guidance.
Answer: The HUD-1 Settlement Sheet is to be "completely" filled out, providing both the buyer's and seller's costs and fees. Neither the buyer nor seller is to walk away from the PFS closing with "cash." The seller, if applicable, may be eligible for the Seller Incentive, but even the Incentive is "not" to be reflected as a payment of cash on the HUD-1.
Question 3: What is the length of time that a PFS Appraisal is valid?
Answer: By issuance of Mortgagee Letter 2010-8, dated March 8, 2010, it advised the lending industry that effective April 1, 2010, REO Appraisals are valid for 120 days. The required PFS "As-Is" Appraisal is to be prepared by following HUD Handbook 4150.2 (Valuation Analysis for Single Family One-to-Four Unit Dwellings) Appendix A and therefore valid for 120 days. Lenders will need to submit a Variance to request the Appraisal to be extended to allow for closing.
Question 4: Can a Lender utilize the buyer's appraisal to review the property that is accepted into the PFS or must the Lender acquire an independent one?
Answer: If the buyer has secured an FHA-insured appraisal, use of the buyer's appraisal would be allowed.
Question 5: Mortgagee Letter 2008-43 incorporates guidelines for varying minimum Net Sales Proceeds based on the length of time a property has been competitively marked for sale. Please advise the correct Tiered Net Proceeds Requirements and the length of time the ratio is valid.
Answer: The Borrower must be willing to make a commitment to actively market their property for a period of four months. 1) For the first 30 days of marketing, Lenders may only approve offers that will result in a minimum Net Sale Proceeds of 88% of the "as-is" appraised Fair Market Value (FMV). 2) During the next 30 days of marketing, Lenders may only approve offers that will result in minimum Net Sale Proceeds of 86% of the "as-is" appraised FMV. 3) For the duration of the marketing period (60 days), Lenders may only approve offers that will result in minimum Net Sale Proceeds of 84% of the "as-is" appraised FMV.
Question 6: Borrower is deceased, his father has been making the payments, property was tenant-occupied for eight months, and now the father wants to know if he can acquire the property under the PFS Program?
Answer: Mortgagee Letter 2008-43, Paragraph I, bullets 1 and 5 state respectively: Use of Real Estate Broker states in part: The Broker/Agent selected should have no conflict of interest with the Borrower, the Lender, the Appraiser or the Purchaser associated with the PFS transaction. Any conflict of interest, appearance of a conflict, or self-dealing by any of the parties to the transaction is strictly prohibited. A Broker/Agent shall never be permitted to claim a sales commission on a PFS of his or her own property or that of an immediate family member (e.g., spouse, sibling, parent, or child)." Arms-Length Transaction - Borrowers and Lenders must adhere to ethical standards of conduct in their dealings with all parties involved in a Preforeclosure Sale transaction. The Preforeclosure must be between two unrelated parties and be characterized by a selling price and other conditions that would prevail in a typical real estate sales transaction.
Question 7: If the Lender is the Holder of both the first and second mortgages can the Lender utilize the $1,500 that is available to pay towards the settlement of the second mortgage?
Answer: Yes, Mortgagee Letter 2008-43, page 13, paragraph J, Contract Approval, states in part: 5. Up to $2,500 to be used for the discharge of junior liens if closing occurs within 90 days, Within 90 days, the first $1,000 represents the Borrower's consideration and the additional $1,500 represents FHA's consideration for a total of $2,500. If settlement occurs after 90 days, the first $750 represents the Borrower's consideration and the additional $1,500 represents FHA's consideration for a total of $2,250."
Question 8: Is it possible to do a PFS after the Lender has already completed a Partial Claim?
Answer: PFS may follow a Partial Claim if there is a new reason for default and the Borrower lacks the financial ability to cure the present default. The Partial Claim amount must be added to the Unpaid Principal Balance and the Accrued Interest amount to correctly calculate total outstanding mortgage indebtedness.
Question 9: Can a buyer utilize Nehemiah-type financing programs in conjunction with the purchase of a house that has been approved to participate in the PFS Program?
Answer: No, Nehemiah mortgages are disallowed when the buyer is obtaining FHA financing to purchase a house that is participating in the PFS Program.
Question 10: Is it the responsibility of the Lender to acquire marketable title?
Answer: Mortgagee Letter 2008-43, Paragraph G. Condition of Title, Page 9, states in part, All properties sold under the PFS Program must have marketable title.